The Senate unanimously voted to approve a bipartisan bill that could ultimately force Chinese companies to surrender their listings on US stock exchanges.
Chinese companies have raised $66 billion through US capital markets since 1997. Although, dozens of instances of fraud have finally led to a legislative pushback against shady Chinese listings. The new legislation would force Chinese companies that list in the US to submit to more oversight from American auditors. Firms that don’t comply will risk delisting from American exchanges.
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Sen. John Kennedy (R-LA) co-wrote the bipartisan piece of legislation with Sen. Chris Van Hollen (D-MD), and he says it ultimately comes down to protecting investors. “All the rest of us want is for China to play by the rules,” Sen. Kennedy said in a speech from the Senate floor on Wednesday. “This has gone on for years and years.”
A Long Controversy
Indeed, there is s long and well-documented controversy surrounding Chinese stock listings. Over the past ten years, there have been dozens of instances of fraud from Chinese companies. Chinese authorities rarely bring criminal charges against businesses that defraud American investors. Also, some finance experts have accused the Chinese government of being complicit in what amounts to mass exportation of financial fraud.
The prolific amounts of Chinese fraud wouldn’t be possible without lacking oversight from US auditors. China has been very reluctant to allow American regulators to routinely access audit records. Therefore, Wall Street mostly relies on Chinese firms to conduct audits and due diligence investigations into US-listed Chinese companies.
US regulations require publically-listed companies to submit to regular audits from firms that have been inspected and approved by the Public Company Accounting Oversight Board. The PCAOB and the SEC have been pushing for more access into Chinese audit records for years. Although, those efforts have been largely unsuccessful. However, regulators have proven to be unwilling to remove Chinese listings from the New York Stock Exchange and NASDAQ, and rampant fraud continues to be a problem.
Wall Street firms generate massive underwriting fees by helping Chinese firms make initial public offerings on American exchanges. Underwriters keep their fees in the event that someone discovers the fraud. Investors, therefore, are ultimately left holding the bag when share prices plummet. Critics have argued that this lack of accountability serves as a cause as to why the broken system continued to propagate for so long. Wall Street carries a lot of weight in DC. So, it’s no surprise that there hasn’t been a significant legislative effort to combat the issue up until now.
The new Senate bill would force the SEC to prohibit trading for any company that hasn’t faced a PCAOB-approved audit for three consecutive years. It also requires any American-listed company to disclose whether a government entity owns them. Now that the Senate has approved the bill, it will go the House for another vote.
While the bill is undoubtedly a step in the right direction, an argument can be made that it’s not enough. The three-year window for US audits still gives unscrupulous firms a large loophole to squeeze through, and the bill doesn’t address the lack of accountability from complicit American underwriters. Fraudulent Chinese companies shouldn’t be allowed to raid American capital markets with impunity. However, Wall Street and DC need to overlook their greed and put their foot down if they want to make it stop.